How SEBI Is Helping Unlock The Potential Of Alternative Investments In India

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KEY TAKEAWAYS

1. SEBI has played a crucial role in shaping the alternative investment industry in India by introducing a series of regulations and guidelines, starting with the Alternative Investment Funds Regulations in 2012.

2. The introduction of OBPP regulations in November 2022 marked a significant step towards simplifying bond investments and making them more accessible to retail investors, with platforms like Grip Invest and Wint Wealth.

3. In March 2024, SEBI introduced guidelines for SM REITs to regulate the fractional real estate market, ensuring transparency and protection for investors in smaller platforms.

4. SEBI's decision in July 2024 to reduce the face value of privately placed bonds from Rs 1 lakh to Rs 10,000 was aimed to encourage retail participation in the corporate bond market.

5. The introduction of a liquidity window facility in October 2024 addressed the issue of liquidity in corporate bonds, providing a mechanism for investors to exit their investments before maturity, thereby attracting more retail investors.

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It's been more than a decade since India’s market regulator SEBI introduced regulations on alternative assets in India. In the year 2012, SEBI had come up with the Alternative Investment Funds (AIF) regulations. Fast forward to today, the size of India’s alternative investments industry managed to already go past the Rs 11 lakh crore mark (in terms of AUM) in March 2024. Certainly a big enough number to not ignore, right? In fact, by the year 2030, which is just about six years away, the alternative segment has the potential to cross $500 billion in investments by 2030, i.e. about Rs 41 lakh crore!

If we specifically look back at the last couple of years or so, they have clearly been landmark years for the alternative investments industry in India, with market regulator SEBI finally beginning to take not one but multiple big steps towards opening up this segment to the retail investors, and making it more regulated and accessible.

Wondering how all this is happening? Well, fret not, as in this article, we will bring to you the list of key steps that the market watchdog has taken towards the alternative investments space, with regulations and guidelines pertaining to bonds, SDIs, OBPPs etc.

Big Steps Taken By SEBI:

Introduction Of Alternative Investment Funds Regulations - May 2012

The first big step that the SEBI took was the introduction of Alternative Investment Funds Regulations, 2012. This was aimed at regulating all forms of private pool of funds in India. The said regulations divided the AIFs into three broad categories - Category-I, Category-II and Category-III, depending upon the operational strategies, objectives and fund structure. With this regulation’s introduction, at least alternative investments industry got the much needed recognition and what turned out to be the beginning of many other big guidelines and regulations that followed in the next decade or so, and opened up the industry to retail investors too. You can read the circular here.

If you are interested in reading more on AIFs, you can also check this article.

Fast forward to 2024, i.e. more than a decade after these guidelines came into the picture, AIF investments in India have crossed the Rs 4 lakh crore mark already in June 2024, as per SEBI data.

Introduction Of OBPP Regulations - November 2022

Another big positive step that the SEBI took towards alternative investments industry came in 2022, when the market watchdog introduced OBPP (online bond provider platforms) regulations two years ago.

In November 2022, SEBI had introduced the OBPP regulations after acknowledging that India’s bond market has been offering tremendous scope for development. For the unversed, OBPP platforms simplify the bond investment process using technology. Many of them also offer other alternative investment options such as invoice discounting, SDIs, etc. Surely, the OBPP regulations opened up the market for retail investors who might be interested in investing in bonds and other alternative investment options but were hesitant to go to such platforms due to lack of guidelines earlier.

Speaking of OBPPs, some of the major OBPP players in the Indian market currently include Grip Invest, Wint Wealth, Aspero, IndiaBonds, GoldenPi, etc.

If you are interested, you can read the SEBI circular here.

Introduction Of SM REITs Guidelines To Regulate The Fractional Real Estate Market - March 2024

Earlier this year in March 2024, the SEBI brought out a new set of guidelines for SM REITs, to regulate the existing as well as thriving fractional real estate market. For the unversed, SM REITs are like a smaller version of traditional REITs, which are present in the market for quite some time.

Until that circular came in, the entire process, from platforms pooling in investors money to buy a property through an SPV (LLP / Pvt. Ltd), distribution of rental income to investors, to realization of capital gains upon sale of property, was unregulated, as SEBI did not have any regulation for small and medium scaled platforms. That is where the introduction of SM REITs license in March 2024 by SEBI was brought in, to solve this problem by regulating smaller platforms currently operating in this space.

You can check out the details of this regulation in this blog below, that we wrote after SEBI came out with the SM REITs regulation circular. From defining the eligibility criteria of investment manager, migration of existing schemes, asset size & minimum investment amount, to offer letter disclosure, SEBI touched upon a lot of much-needed aspects through these SM REITs regulations.

Drastic Reduction In Face Value Of Bonds From Rs 1 Lakh To Just Rs 10,000 - July 2024

In a big boost to the retail investors, SEBI had this year drastically cut the face value of privately placed bonds which is more than 95% of the debt market from Rs. 1 lakh to just Rs. 10,000.

This lower ticket size was primarily aimed to encourage more retail investors to participate in the corporate bond market. This, however, is subject to certain conditions like the issuer should appoint at least one merchant banker. But this too makes the process stronger for you as a retail investor, right?

If you are interested, you can read the SEBI circular here.

Introduction Of New Liquidity Window In Debt Securities - October 2024

Its a evident from our community feedback that one of the biggest turn offs because of which many investors stay away from corporate bonds is the lack of liquidity when in time of need.

Addressing this issue, the SEBI had in October 2024 introduced guidelines to put into place a framework for the introduction of a liquidity window facility by the issuers, for debt securities investors, through the voluntary put option.

**In SEBI’s own words “**One of the factors that drives investor participation in a market is the availability of liquidity. Low levels of secondary market transactions in corporate bonds (including due to a large number of institutional investors holding such bonds to maturity) has resulted in the corporate bond market being perceived as illiquid.”

This new liquidity window facility, which has already come into effect from November 2024, aims to attract more investors, particularly the retail investors, by providing a mechanism for them to exit their investments on predetermined dates before maturity.

If you are interested, you can read the SEBI circular here.

Why Hasn't It Always Been a Smooth Road?

While there have been many major steps taken by India’s regulators towards the alternative investments space, its not been a rosy road always. The industry has seen some tough decisions and regulations, especially a recent guideline in August 2024.

On 16th August 2024, the RBI had released tough guidelines for the P2P industry, making the regulations crystal clear to stop all the creative interpretation that various P2P platforms were doing. We have some infographics on the P2P space which can be accessed here.

RBI had said “It has been observed that some of the NBFC-P2P platforms have adopted certain practices which are in violation of the 2017 Directives. Such practices include, among others, violation of the prescribed funds transfer mechanism, promoting peer to peer lending as an investment product with features like tenure linked assured minimum returns, providing liquidity options and at times acting like deposit takers and lenders instead of being a platform.”

A new guideline from the RBI introduced the T+1 settlement. Previously, platforms had no set time to deploy investor funds. Now, once funds are in the escrow account, they must be transferred to borrowers or returned to lenders. Repayments must also be transferred back to the lender's escrow and then to their bank account within a T+1 timeline. Many P2P lenders find this challenging due to the short timeframe to find borrowers.

You can read our blog about this circular here.

However, in one of our recent podcasts with Castler’s founder Vineet Singh, he had mentioned that this T+1 regulation for P2Ps has been very beneficial for his platform, because they had the escrow stack ready. They had been working with P2P lenders over the last few years and were able to roll the stack out within a few hours after the regulation was announced. So, as per him, the T+1 settlement is doable and his platform Castler has already implemented it, so it is technologically possible.

Nonetheless, the T+1 regulation has broadly been considered a really tough pill to swallow for P2P players, with many of them (such as Faircent, Cred and Mobikwik) still attempting to somehow adhere to the guidelines by reworking on their products.

Conclusion

In conclusion, we can say that the journey of alternative investment industry in India has been significantly shaped by the proactive measures being taken by SEBI. Over the years, the market regulator has introduced a series of reforms and guidelines aimed at enhancing transparency, accessibility, and investor protection within the alternative investment sector. From the introduction of the Alternative Investment Funds Regulations in 2012 to the recent amendments and initiatives such as drastic reduction in debt securities’ face value from Rs 1 lakh to just Rs 10,000 in the year 2024, many such steps have collectively contributed to the growth and maturation of the alternative investment industry.

While challenges remain, particularly with stringent regulations like the T+1 settlement for P2P lending, the overall trajectory indicates a promising future for alternative investments in India. As the industry continues to evolve and get its much needed recognition, it is crucial for both the industry as well as the investors to adapt to these changes and leverage the opportunities presented by a more regulated and robust investment landscape in the alternative investment space.

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Please note that this is an opinion blog and not an official research or investment advice. This blog aims to help retail investors make an informed decision when thinking of real estate sector. The blog neither encourages nor discourages you from investing in any particular platform or property or any asset class.

We plan to come up with more blogs discussing various aspects of the alternative investments space, such as regulations and guidelines, company profiles, different types of instruments available in the world of alternative investing, and much more. If you want to stay updated on the latest blogs, please subscribe to our newsletter so that you get notified automatically.

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